Two major rail projects might be funded with bonds that experts warn could land future generations with a massive bill.

Two major rail projects might be funded with bonds that experts warn could land future generations with a massive bill.

The Dallas Area Rapid Transit board approved a backup financing plan last week for the suburban Cotton Belt commuter railway and the downtown Dallas subway. The projects are estimated to cost about $1 billion each.

The Dallas City Council voted last week for plans to build the subway under Commerce Street. The 26-mile Cotton Belt line, which will run from Plano to DFW International Airport, has been a point of contention between the city and the suburbs because some have worried that the Cotton Belt would be prioritized over the subway.

The backup financing plan, though, would allow both projects to move forward with or without federal help, which some local politicians have been concerned about.

The vote allowing for the backup financing gives DART the option to use traditional bonds or capital appreciation bonds, a controversial funding mechanism that the agency has never used before.

Whereas traditional bonds issued by most government agencies require regular payments, the bill isn't due on capital appreciation bonds until many years after they are issued.

"Several school districts use these," said DART spokesman Morgan Lyons. "They're very solid."

But some experts say that deferring payment on debt can get out of hand.

Upon hearing the term "capital appreciation bonds," Tracy Gordon, a senior fellow with the Urban-Brookings Tax Policy Center, responded with an "Oh no."

"It's a way of backloading the costs on other generations," Gordon said.

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As a cautionary tale, she pointed to the Poway Unified School District in San Diego, which borrowed $105 million in 2011. Because the district did so through capital appreciation bonds, or so-called CABs, taxpayers will end up owing nearly $1 billion in the long term, according to news reports.

Robert Bland, a University of North Texas professor who focuses on city government and budgets, echoed that concern. He said CABs come with "substantial risk," though he added that DART generally has a good history of fiscal planning.

"Their financial manager has certainly been very astute and a top-notch manager, so I would be a little more supportive, I guess, or encouraging if DART went that direction," Bland said.

If the board does go that route, he said, then it should have a reserve fund to accumulate the principal and interest to pay off the debt. Lyons, the DART spokesman, said the agency is required to do so.

"By our rules, we have to have a reserve equal to a year's worth of principal and interest," he said.

Lyons reiterated that DART may never use CABs. It could always use traditional bonds.

"It adds that to the list, the menu of options," he said.

One of the main concerns about CABs is how various factors could alter the bonds, like if another recession hits or if a member city left DART, taking its sales tax with it.

The agency has been through challenges like that before, though, Lyons said: From 2000 to 2010, the agency's main revenue — sales tax — remained flat, but DART still doubled the rail lines, he said.

"In 2000, we had 20 miles of light rail. By 2010, we were more than 60 miles," he said.

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Route for suburban Cotton Belt commuter railway

For the Cotton Belt, DART originally planned to use a $908 million Railroad Rehabilitation and Improvement Financing loan through the Federal Railroad Administration.

In June, the board voted against using that method. But at a meeting Sept. 12, the revamped board — several new members had been appointed — said DART could use the federal loan, CABs or a combination of the two.

If DART doesn't get the loan, the agency could issue up to $908 million in CABs.

Proposed Commerce Street route option for downtown Dallas subway

SOURCE: DART(Michael Hogue / Staff Artist)

For the downtown subway, DART is pursuing a $650 million capital investment grant from the Federal Transit Administration. The rest of the subway project would be financed through traditional bonds and the debt repaid through sales taxes.

But under President Donald Trump's proposed budget, the federal grant program would face significant cuts. Congress will ultimately decide its fate.

But the unpredictability of what might happen at the national level left DART administrators looking for ways to finance both the Dallas subway and the suburban Cotton Belt no matter what happens.

In previous months, attempts to separately organize financing for the projects pitted Dallas and suburban board members against each other. The two camps worried that if there's not enough money for both projects, then their preferred rail won't be prioritized.

The Dallas City Council overhauled the DART board this summer to reflect its stance: Fund the subway, not the Cotton Belt.

DART has not been as concerned about acquiring the loan for the Cotton Belt as it has been with obtaining the grant for the downtown Dallas subway.

In an effort to avoid political turmoil altogether, DART has lumped the two projects together.

If the federal grants don't come through or the full $650 million isn't allotted, DART could pursue up to $350 million in CABs. The remaining amount would need to be covered in another way if the agency didn't receive the grant. Some options have been discussed, but members won't need to decide on one until later.